Friday, April 25, 2008

Airline Chiefs Cite Fuel Costs, International Competition as Major Reasons to Merge

This posting was written by Sarah Borchersen-Keto, CCH Washington Correspondent.

The chief executives of Delta Air Lines and Northwest Airlines, testifying before House and Senate Committees on April 24, cited the unprecedented rise in fuel costs and increased international competition as key factors behind their proposed merger. They also stressed that the proposed merger will not lead to any lessening of competition.

Delta CEO Richard H. Anderson told a Senate Judiciary subcommittee that the combined airline would be able to withstand an 80 percent greater increase in fuel prices than either airline standing alone, and still maintain profitability.

Fuel is “Game-Changer”

“This financial strength and flexibility, much greater than either airline standing alone, will provide additional resources to help weather this unprecedented fuel cost environment and a softening domestic market,” Anderson said. In a hearing earlier in the day before the House Judiciary Committee’s antitrust taskforce Anderson told lawmakers, “oil is a game-changer,” noting that oil prices have driven five carriers into bankruptcy since the start of the year.

Northwest CEO Douglas M. Steenland noted that with fuel prices at record highs, and amid an economic slowdown, “we remain financially challenged.” He noted that high fuel costs have significantly eroded the benefits of restructuring at both airlines.

Heightened International Competition

Delta and Northwest also pointed to heightened international competition, particularly as a result of open skies agreements, as another major reason to merge. Steenland stated that “large, well-funded foreign airlines” have been increasing their service to the U.S. because of open skies. Anderson said the continuation of the open skies policies requires the carriers to combine their networks in order to compete.

Turning to concerns over the competitive nature of a Delta-Northwest merger, Steenland told the hearing that a merged carrier would maintain all of Delta and Northwest’s hubs, serve more domestic and international destinations than any other carrier, while also serving 140 small communities in the U.S. Anderson, meanwhile, stressed the complementary nature of the carriers’ two networks, with Northwest focusing on the upper northwest, and Delta’s domestic focus centering on the east and mountain west.

“Momentous Matter”

At the House antitrust taskforce hearing chairman Rep. John Conyers (D-Mich.) described the proposed merger as a “momentous matter” which required adequate time to consider the many aspects of the deal. “We need to consider where this merger will take us,” Conyers said, adding that if approved it could lead to a “cascade of other mergers.”

While warning of a situation in which three mega-carriers compete with a handful of low-cost carriers, Conyers also acknowledged that if the merger is rejected “we could end up with more carriers in bankruptcy, negating more union contracts, including pension and health care benefits.”